(March 9): A measure of credit risk jumped and bond sales in Europe were put on hold on concerns that soaring oil prices and a prolonged war in the Middle East will weaken corporate balance sheets and heighten repayment risks.
A handful of corporate and financial-sector borrowers that had been looking at raising debt in Europe stood down, according to people familiar with the matter, who asked not to be identified. With deals already delayed last week, there is now a pipeline of issuers waiting to tap the market when the opportunity arises, some of the people said.
The cost of protection against corporate defaults jumped on Monday as markets priced in a longer-lasting conflict and oil-price shock. In Europe, the iTraxx Europe index of investment-grade firms reached the highest since May, while the Crossover index of junk-rated credits crossed 300 basis points for the first time since June. Credit default swaps on Asian investment-grade debt widened by nine basis points, according to traders, the biggest such move in 11 months.
The sharp rise in the cost of credit insurance is part of a global retreat in risk appetite amid worries that the world economy may face slowing growth and higher inflation simultaneously. Yields on benchmark 10-year US Treasuries rose as much as eight basis points to 4.21%, and traders scaled back expectations for the Federal Reserve’s next quarter-point rate cut.
The war and oil shock is adding stress to a market already concerned about the health of private credit, after BlackRock Inc became the latest asset manager to curb withdrawals from one of its biggest funds in the sector. Unease has been mounting in private credit over heavy exposure to software companies vulnerable to artificial intelligence and a number of high profile blowups.
See also: Global bond rout grows as oil jump upends interest-rate outlook
Issuance expectations
New bond sales were stymied by the outbreak of the war last week, but market participants had been hopeful of things getting back up and running. Respondents to Bloomberg’s European issuance survey on Friday estimated total volumes of between €15 billion (US$17 billion or $22.2 billion) and €30 billion-equivalent this week. In the US, dealers in an informal poll anticipated around US$60 billion ($76.8 billion) of sales this week.
Primary markets are not completely closed, with Industrial and Commercial Bank of China Ltd looking to raise euro- and sterling-denominated debt through its Luxembourg and London branches in deals announced earlier this morning.
See also: DBS secures principal underwriting licence for China non-financial corporate bonds
The UK’s DMO and the European Union are both expected to issue bonds this week, and markets will be closely watching the demand and schedule for those deals.
Corporate bond returns are also taking a hit from inflation fears. With spreads widening and underlying government yields rising, the global high-grade credit index has shed almost all of its year-to-date gains — a swift turnaround from gains of 1.6% just over a week ago. Less than 15 of the euro high-grade index’s more than 4,000 components rose on Monday.
Last week saw small outflows from euro investment-grade funds across long- and short-duration funds, according to Barclays plc, which cited EPFR data. Outflows from credit could change the long-standing market dynamic of investors flush with cash that had been supporting demand for credit.
“This is the time to de-risk,” said Raymond Lee, chief investment officer at Torica Capital in Sydney, adding that he has been moving into higher-quality and shorter-dated bonds in his portfolios.
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